Changing How We Think about Ownership Before the Next CBA: It Isn't about Profit

Don McPeak-US PRESSWIRE

On the heels of what Dirk called the "Worst NHL Article Ever Written," not least for its player name misspellings and general NHL bylaw illiteracy, but also for its financial illiteracy, I wanted to briefly highlight a great piece that spells out, with crystalline logic, how we fans -- and, more importantly, hockey reporters -- should think about the "problems" of hockey team ownership. Continue reading for a little bending of conventional wisdom, and remember that there is no spoon....

Let me preface this by saying that none of this means the NHLPA is beyond reproach for what happened over the last few months. They made Donald Fehr their executive director in 2010 for a reason, and they seem to have gotten their money's worth out of him. Yes, the owners unanimously voted to lock out the players. But the lockout lasted as long as it did because Fehr kept telling the players "Wait; you'll get a better deal." And they did.

The point is that how we think about the business of hockey is worth considering now, well ahead of the next round of CBA negotiations; if we can change our culture of misunderstanding ahead of time, perhaps we can avert disaster when billionaires and millionaires reconvene in ten years to argue over a few percentage points.

While I generally reject the banal "rich guys vs. the rest of us" framing he uses, Slate Moneybox blogger and economic pundit Matthew Yglesias offered a really smart look at pro sports franchise ownership last week, against the backdrop of the conclusion of the lockout. Here's the thrust of his argument:

If you're the owner of, say, the New York Knicks then you should of course want the Knicks to have lots of revenue since the revenue can be plowed into helping the team win. But any Knicks fan would be willing to incur some non-zero quantity of financial losses in order to see the team win its first NBA championship in decades. Lots of people, of course, wouldn't want to do that. But that's just to say that lots of people aren't Knicks fans. And lots of Knicks fans couldn't afford to spend very much money on seeing the team win, which is just to say that lots of Knicks fans aren't rich. But obviously a rich Knicks fan is going to be willing to bear a non-zero financial cost in the pursuit of victory. And who but a rich Knicks fan is going to own the Knicks?

Or you can think of it from an asset value viewpoint. A rich investor needs to choose between bidding on an NHL team and bidding on an equally profitable Tim Horton's franchise. Well if he loves hockey, he's going to be willing to pay a premium to own an NHL franchise (fun!) rather than a boring Tim Horton's. So if a bunch of different investors are considering bids on both properties, ultimately the NHL team is going to end up in the hands of a hockey fan who's going to end up "overpaying" for the team if you value it as a business.

That, at any rate, is how it should be. Owning a pro sports franchise is pretty awesome and it's something that high net worth sports fans ought to be doing as a costly hobby. The relevant financial fact is that it's a costly hobby you can exit from by selling your team to the next guy.

And as a general refresher, back in the fall Dirk debunked the idea that the league is somehow hamstrung for cash (emphasis added):

In order to lose $273 million back then [a claim the league made in 2004, prior to the last lockout], "other costs" (outside of player costs) must have been in the ballpark of $770 million.

Since that time, however, the league rolled back player salaries by more than 20%, and put a cap in place, so that player costs rose in line with revenues. In today's world of $3.2 billion in league revenues, that can only mean that "other costs" have basically doubled since then, as player costs have only risen by 25-30% overall.

Even if you use a generous figure of the players getting 60% of revenues today (a little higher than 57% due to high-salary players stashed in the AHL, long-term injury costs, etc.) that puts player costs around $1.9 billion for last season. $3.2 billion in revenue - $1.9 billion in player costs yields more than $1.3 billion in "other costs" that would still allow them to break even, but apparently they are even higher than that if Renaud's informant is correct.

So owners claim they're losing their you-know-whats, but they signed millions of dollars worth of contracts just before the awful, horrible, no good, very bad previous CBA expired, all while taking backhanded swipes at former teams and getting hefty municipal subsidies to manage and run arenas, and we're supposed to think that how they think about their plights as owners is normal and desirable (perhaps as long as it's packaged with an "I'm sorry" after a 113-day lockout)?

I won't pretend to know what sorts of specific financial choices pro sports team owners face, though I could probably follow a quarterly report pretty easily. I've personally had a hand in running businesses that have been huge successes and others that have been abysmal failures. What I do know is that pro sports owners are in the business of selling entertainment.

The business of hockey isn't like Broadway or Hollywood; the choices faced by the owners (or producers) in those entertainment sub-industries are much more manageable than in the NHL because the people pulling the purse strings are not drastically trying to change the outcome of the story as acted out on stage or film. They spend a bunch of money up front to make a product, and they make up their losses on the back end with ticket sales, licensing, DVDs, etc.

But a hockey team owner is drastically trying to change (or preserve, depending if he's a defending champ) the outcome of the previous season, and their product is always changing (player health, attitude, and consistency, in-game entertainment, etc.). They're trying to win a championship! Championships draw sponsors, and sponsors pay lots of money to teams. But the NHL has 30 teams, and only one annual champion. That's not to say that only champions draw sponsors, but it seems to be a matter of pride for owners to win and win big (see Leipold, Craig, circa 2007 when he took his ball and went home after Peter Forsberg didn't get him out of the first round of the playoffs).

Add to this, as Yglesias points out, that pro hockey team owners are incredibly (and independently) wealthy hockey fans (if pro sports ownership were a profitable venture, wouldn't we all be forming sports teams and separate leagues?), and their investments in personnel and facilities begin to appear much more emotional than if they had been based on pure ledger-based rationale. (If they were serious about being profitable, for example, they might consider something like inviting a private equity firm to restructure them -- but they haven't.) Harvey Weinstein might like some of the movies he produces, and even some of his directors and actors. But Harvey Weinstein doesn't produce movies because producing movies gives him a rush; he does it because he thinks the scripts and the production teams he backs will make him filthy stinking rich. I wonder what would happen if owners told GMs "Don't make any personnel decision that won't help us land a new sponsor"? (Imagine the possibilities: Shea Weber on a Brawny paper towel roll, David Legwand in a Crest commercial, Sergei Kostitsyn in a ... oh, nevermind.)

I don't want to deprecate anyone's material achievement, and I won't begrudge anyone for wanting and trying to make a buck -- least of all someone who's clearly really good at it. In fact, if I was independently wealthy, I would blow a significant portion of my fortune on hockey ownership -- I was one of those people who, in 2007, swore I would buy the Nashville Predators from Leipold if I ever won the lottery. But as long as we continue to try to think about NHL team ownership as savvy businessmen running for-profit enterprises, rather than as independently wealthy people playing with really elaborate play sets and real-life action figures, I predict that we'll continue to hold ourselves back as fans in terms of what we're willing to tolerate with these lockouts and CBA fights. And what we're willing to tolerate is how they decide how far they're willing to go when making things painful for us.

Agree? Disagree? Sound of in the comments!

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